Has the buy America rally got legs?

Stock markets are on pause this morning, after strong gains at the start of this week. Stocks in Europe have edged lower this morning and US equity market futures are also pointing to a weaker open. The Hang Seng is down more than 1.7%, which is a sign that residual trade concerns may limit investor enthusiasm for a prolonged risk rally. Tarif rates are being revised lower by the US, but there are still tariffs. A rate of 30% on Chinese goods coming into the US is still going to impact the consumer and corporate earnings. This is why Walmart’s earnings later this week are a must watch for traders, and why US stocks may struggle to make fresh 2025 highs.

Gold has stabilised after a sharp sell off on Monday, and the oil price is hovering around $65 per barrel, in a sign that animal spirits are contained for now, as investors wait to see how the US/ China negotiations play out over the next 90 days, and as they wait to see how negotiations develop between the US and the EU.  

Why US equities can recover without threatening Europe 

The pause in the equity market rally is to be expected. The trade agreement between the US and China was a powerful driver for overall risk sentiment at the start of this week. The focus was on American equities, which were bought in favour of safe havens like gold, the yen and the Swiss franc. However, if this ‘Buy America’ theme is here to stay, then we will need to see a shift out of European equities, which have been outperforming US equities so far this year. SO far there are no signs that this is happening. European stocks are still outperforming their US counterparts YTD, and in the past month, the Eurostoxx 50 index has outperformed both the S&P 500 and the Nasdaq 100. The S&P 500 and the FTSE 100 have both gained about 8% in the past 4 weeks.

We continue to think that European stocks will be top performers this year, for a few reasons. 2025 has shown the market the benefits of regional diversification, and Europe has its own thing going on: German fiscal spending and European defence spending. 

The impact of tariffs could be long lasting, especially for tech 

Although the tariff situation with China is better than what it was, the initial exuberance could mask a bigger issue for US stocks. Can the tech sector lead the US stock market rally higher? There has been existential angst around the threat of Deepseek for most of this year, which has weighed on Nvidia’s share price, which is still lower by 10% YTD, even though the narrative around tariffs has shifted. Even with better trade relations between the US and China, the recent trade embargo between the two nations may entice even more Chinese innovation into the area of AI and chip technology, which could threaten the dominance of Nvidia. China is developing its own chips with Huawei and Alibaba. These chips could penetrate more than just the Chinese market, with potentially the entire Asia region looking to diversify away from US for the most advanced tech components. Due to the size of the US tech sector, this could hinder the ability for US stocks to outperform this year, even if they are in recovery mode right now. 

Continuing concerns about the long-term damage of tariffs is visible in the performance of the dollar. The USD is the weakest currency in the G10 FX space on Tuesday, after the dollar index failed to break above the key 50-day sma at 101.85. The FX market may still target a break above this level, but for now, the dollar rally has stalled. The dollar index is still 7.5% below its peak in January. While stocks can cheer the trade negotiations, there is a reluctance in the FX market to unleash a recovery rally in the dollar. This could be a sign that there is a structural shift out of the dollar, and out of US assets that may hinder a long-term recovery in US stocks.

UK wage growth to keep BoE wary of rate cuts

The UK labour market data doesn’t shift the dial too much for the BOE: job growth is slowing; the unemployment is edging higher at a slow pace and wage growth remains strong. Wages for the private and public sector are converging, and remain at a high level, which could hinder the scope of rate cuts that the BOE thinks is possible without stoking inflation. £ view 

Ahead today, economic data will be in focus. US CPI is released at 1330 BST, and while the latest US/ China trade deal has changed the outlook for inflation, this report is still worth watching.

The US CPI report for April will be critical to determine the immediate impact of tariffs on Chinese goods on US inflation. The prevailing narrative is that tariffs will drive inflation higher in the US. However, it may not be that simple. Inflation pressure is expected to remain moderate in April. The headline rate is expected to rise by 0.3%, the annual rate is expected to remain steady at 2.4%. Core inflation is also expected to remain steady at 2.8%.

Although headline inflation is expected remain steady, this will still be a litmus test for the inflationary impact of US tariffs. The monthly rate of headline inflation is expected to rise by 0.3%, a reversal of the -0.1% decline in March. We will be watching closely the sectors that are exposed to China, for example apparel and household furnishings. However, we do not think that April’s prices will truly reflect the impact of tariffs. Prices will take time to adjust, and it is likely that in April retailers were still selling inventory that had been accumulated at the end of 2024 and early 2025, before tariffs on some Chinese goods came into effect in February. Service prices have been trending lower, and we expect that to continue, as demand slows on the back of worries about the economy. Ironically, prices could surprise on the downside, even with tariff risks, as businesses tried to entice consumers to buy products or go out and spend money, in a tough environment.

May’s CPI data could be more useful, since cargo shipments from China started to decline sharply from April, after the 145% tariff was imposed. New tariffs weighed heavily on imports from China to the US last month, which is why May prices could be a better reflection of the impact of tariffs on US price growth.

The risk is for a near term decline in prices due to a fall in consumer demand, which then leads to a surge in CPI growth due to a shortage of goods on the shelves. Adding even more complexity to the outlook, trade talks between the US and China started last weekend, and the market hopes for a dramatic reduction in tariffs that will allow a larger flow of cargo from China to the US in the second half of May.